SARS must have been very relieved in March when it got a big windfall with the hike of the dividend withholding tax from 15% to 20%.
This follows reports that the revenue service is under pressure.
If money is getting tight for the Receiver of Revenue, the recent ratings agencies’ downgrades will have a negative impact on the taxpayer too. You will have to make every cent count, and that also means making sure that you don’t pay any more tax than you absolutely have to.
We all know that companies must pay SARS R28 on every R100 profit they make. But that does not apply to all businesses. There are lower tax rates for small businesses.
For example, if your business makes sales of up to R1 million for the year ending end February, it may qualify to only pay Turnover Tax, if:
- your business is not a Personal Service Provider (this is where the owner of the company is the person who actually delivers the service, like an accountant or an estate agent)
- you and the other owners are people (not companies)
- you and the other owners are not owners in other companies
- not more than 20% of your personal income comes from Professional Services
- the business was not previously registered for Turnover Tax; then you can register your business for Turnover Tax.
What are the benefits?
Let’s say that your business’ annual turnover is R1 million, then you would pay R6,650 + 3% of turnover over R750,000, i.e R6,650 + R7,500 = R14,150 Turnover Tax (even if you make very little, or no profit).
With the same turnover of R1 million and, say, a net profit of R500,000, if your business is registered for Company Tax your tax bill would be 28% of R500,000 = R140,000.
And it would take a lot more paperwork. Why? Because, if your business is registered for Turnover Tax:
- it doesn’t have to register for Provisional Tax, Income Tax, Capital Gains Tax, Dividends Tax or VAT, and
- it only submits staff payroll tax (and if you do register, VAT) returns twice a year.
But what if your business’ annual turnover is over R1 million? What if its annual gross income is as much as R20 million? Well, it could qualify for Small Business Corporations (SBC) tax if:
- the business is not a Personal Service Provider
- all the shareholders in your business are natural persons
- you only own this one business
- less than 20% of its turnover comes from “investment” income
In that case, let’s say your business’ taxable income (profit) is R1 million, then you would pay R59,098 + 28% of income above R 550,000, ie R59,098 + R126,000 = R185,098 small business tax.
With the same taxable income of R1 million and if your business is registered for Company Tax your tax would be 28% of R1 million = R 280,000.
What are the other advantages of being registered for SBC tax? You get to:
- write off all assets bought for trade in the year of purchase (i.e 100% depreciation)
- write off all assets bought for manufacturing over three years: with 50/30/20 depreciation rates
Don’t forget: in both cases, if you take a salary of, say, R189,600 (R15,800 per month) your annual salary deductions will amount to R22,284.
Would the savings make it worth your while to register your business for Turnover Tax or Small Business Corporations tax?
About the author: Rick Ed at age 60 sold his business to a younger and more energetic management team. He now educates entrepreneurs on strategic decision making and sales. Rick is a business advisor at DoBetter.Business.